Archive for the ‘Commercial Law’ Category

Bulk Sales Act Repealed

Tuesday, April 4th, 2017

If you go back and look at my blog post for August 22, 2016, you will see that I mentioned Bill 218 and the intended repeal of the Bulk Sales Act.  Well, Bill 218, which was the Burden Reduction Act, 2016, somehow died on the order paper and never went any further.  So, Bill 27 replaced it and we now have the Burden Reduction Act, 2017 which is basically the exact same thing with one big exception:  this one hasn’t died on the order paper and it’s now law as of March 22, 2017.

So, if you are a creditor, you should now start to give significant consideration to asking for security.  And if your debtor is not willing to give you security, then you should give significant consideration to ensuring that you keep those debtors on a tight leash and not advance too much money because you may find that you are walking a tightrope without a safety net.

Something to think about.

CALC

 

Does Your Debtor Owe His/Her/Its Lawyers?

Monday, March 20th, 2017

I read an interesting article about a decision rendered in Newmarket last month in a case that has interesting ramifications.

In Dalcor Inc., the fight was over the priority of creditors.  Trisura had a validly registered PPSA security interest and claimed that it had priority over certain monies paid into court.  The debtor’s lawyers, BPR, claimed that they were entitled to first priority over the funds in court because they had a right to a charging order under the Solicitors Act.

Let’s breakaway on a quick tangent to explain charging orders.  Fact #1: lawyers do not generally work for free.  Fact #2: while parties can represent themselves, the process of litigation does go more smoothly if all parties have lawyers than if the parties represent themselves.  Fact #3: Depending on the circumstances, a lawyer, as an officer of the court, cannot get out of his/her duty to represent his/her client just because the lawyer is not getting paid.  So, for example, if a case has been going on for years and it’s 3 days before trial and the lawyer hasn’t been paid, then he/she cannot simply say “either I get paid, or I do not show up to court.”  If the lawyer was allowed to do this, then the whole scheduling system could be thrown into upheaval.  So, if the circumstances apply and a lawyer is not allowed to quit the case at that time, the lawyer is faced with the unfortunate situation of having to work without any guarantee of payment.  To alleviate or minimize this potentially problematic situation for the lawyer, the Solicitors Act and the common law permit the lawyer to apply for, and if granted to register, a charging order against the property.  This is not an automatic right and the lawyer has to make a motion to the court to get such an order.  In my example, the lawyer is still not guaranteed of being paid, but he/she will at least have some security over any property owned by the client to ensure that at least some (or possibly all) of the legal fees get paid.

Back to our case.  The dispute, then, was between a Personal Property Security Act registered creditor and the debtor’s lawyers and the question was who would get priority.  The secured creditor argued that it had registered and it had done this long before the lawyers came on the scene (and any search by the lawyers would have revealed the secured creditor’s security interest), so the secured creditor should have priority.  The lawyers argued, however, that the PPSA did not apply to this situation.  Paragraph 4(1)(a) of the PPSA says that the Act does not apply with respect to any lien given either by another statute (for example, the Construction Lien Act or the Repair and Storage Liens Act) and Section 20 of the Act says that a security interest is subordinate to any lien that arises prior to perfection of the security interest (usually by registration).  So the lawyers argued that they could have priority over the PPSA-registered secured creditor.  Of course, the question (and hence the underlining) is whether a “charging order” under the Solicitors Act amounted to a “lien”.

The Court held that Section 34 of the Solicitors Act only speaks to “charging orders” but that this is not the end of the situation.  This is because a lawyer can obtain his/her security under either or both of Section 34 of the Solicitors Act or under the court’s inherent jurisdiction granted at common law.  When one discusses the common law and the court’s inherent jurisdiction, the right is referred to as a “charging lien” – and now the magic word “lien” has appeared.  On this basis, then, the court determined that the PPSA did not give a secured creditor priority over a lien claimant and, it followed, that the lawyers could have priority over the PPSA secured creditor.

If you are lending money or you hold some form of security (for example, you are storing something for a customer who doesn’t pay his/her/its rent and you no longer have possession of the item but have registered your lien), this now adds another aspect that you have to look at.  Has your debtor paid his/her/its lawyers?  If the lawyers haven’t been paid, then your security may be behind the lawyers’ unpaid fees and the security that you thought you had for your debt may not be sufficient to ensure that you are paid what you are owed.  If you are a lender, as part of your standard due diligence, you may well want to get assurances from the debtor’s legal counsel that they are not owed any money for legal fees and that no charging orders or liens for fees have been obtained or obtained but not yet registered against the client’s assets.  Similarly, as part of the “regular” reporting required by a debtor (either quarterly or year-end), you may now want to include getting an updated confirmation from the lawyers that they have no unpaid invoices or charging orders related to the debtor.

Something to think about.

CALC

 

Response to a Recent Criticism of Arbitration Clauses

Monday, November 14th, 2016

I read earlier today an interesting commentary on a recent decision of the Ontario Court of Appeal in the Novatrax case.  Let’s start with the basic facts.  Novatrax had an exclusive sales agreement with a German company to sell industrial fans in Canada and the U.S.  Either side could terminate on the giving of 12 months’ notice or without notice in certain circumstances.  The German company terminated giving no notice and saying that it had just cause to terminate.  The plaintiff sued the German company in Ontario and also added as defendants the individual owners of the company along with a new Canadian company that had been set up to take over the sales in Canada and the U.S.  The agreement had a provision that said that the parties agreed that German law governed the relationship and that they would “settle any disputes by a binding arbitration … in Frankfurt.”  Because of this, the German company argued that the Ontario lawsuit should be stayed and that the matter should go back to Germany for determination there.  The motions judge agreed and then the majority of the Court of Appeal agreed.

The commentary that I read took issue with this decision and used it as an attack on arbitrations generally and cautioned readers to consider whether it just might be better off to not have arbitration clauses in the first place.  In doing so, several old chestnuts were thrown out to attack arbitrations.

The first attack was to say that this case showed that, even though there was a belief that there would be only arbitration (and, presumably, that this would reduce legal costs overall), the fact that it gave rise to a fight in the courts, in fact, greatly increased the ultimate costs because there would have to be the arbitration AND the costs of the court fight.  I do not doubt that that was (or will be), in fact, the situation at the end of the day.  But let’s consider two factors.  First, suppose that there was no arbitration requirement and that the clause only said “settle any disputes … in Frankfurt”.  Now we’re only talking about a choice between litigation in the Canadian courts and litigation in the German courts.  You can be guaranteed that the plaintiff would have done the exact same thing – sued in Ontario.  This doesn’t surprise me.  Why?  Because it’s a heck of a lot cheaper for someone in Ontario to sue in Ontario than to sue in Germany.  So the plaintiff would have sued in Ontario and the exact same motion would have been brought and the exact same result would have occurred – the court would have said that they agreed to settle their disputes in Germany, so off to the German courts they go.  And in that situation, whatever the cost of litigation would have been in Germany, it would be increased by the cost of the motion and the appeal in Ontario.  Therefore, whether it is litigation or arbitration, the result (and the increased costs) would have been the same.  So that complaint with respect to arbitration goes by the wayside.

The second factor, already alluded to, is that the plaintiff had the choice of dealing with the matter either in Canada or in Germany.  If the plaintiff had sued in Germany, then the plaintiff would have saved the costs of the fight over where to have the dispute resolved.  Beyond this, if the lawsuit had continued in Ontario, then each side would have had to hire German lawyers to give expert evidence as to what was the law of Germany that governed the dispute.  If the dispute was fought out in Germany, they wouldn’t have to pay for that cost because the German lawyers / judges / arbitrators would have known the law.  In addition, suppose that the plaintiff sued in Canada and won a judgment.  The plaintiff would then have a judgment against a Canadian company (which, presumably, could be wound up pretty quickly with little in terms of assets) and the result is that the plaintiff would have to go to Germany to enforce its judgment against the German parent company and the two German citizens.  I don’t know what the law in Germany is like for recognition of foreign judgments.  If it is like Canada, then an application has to be brought and the application could be fought and there can be an appeal.  Sounds like the same costs of the motion and appeal in this case.  If it is like the U.S., then the plaintiff could end up having to re-litigate the whole case again before the German courts.  In these circumstances (at least based on what has been set out in the case), I would have been inclined to tell the client to just sue everybody in Germany because it would be easier to enforce the judgment.  So, the position that arbitration isn’t cheaper and, in fact, could be more expensive isn’t supported by other factors that would have existed even if it were simply litigation and not arbitration.

The authors also question the result of the decision because the result was that the plaintiff was not able to proceed with its claim in Ontario against the Canadian subsidiary and the two German owners because any arbitration in Germany would have only been between the plaintiff and the German parent company.  As noted by the majority of the Court of Appeal, there was nothing to stop the German owners and the Canadian subsidiary from agreeing to be parties to the German arbitration.  (This is possible, but the only reasons I can quickly think of why they would want to do so would be to ensure that there were not inconsistent findings by different triers of fact – be it judges or arbitrators – and to keep the dispute confidential.)  Moreover, once the arbitration was done, the plaintiff could start again its lawsuit in Canada against the subsidiary and the German owners – if they didn’t settle based on the arbitral decision.  The authors suggest that somehow this taints arbitration because it could force either non-parties into the arbitration or else it creates a multiplicity of proceedings (separate arbitrations and lawsuits).  There are three responses.  The first response is that of the majority when they found that it was “very doubtful” that there was merit to the claims against the two German owners.  If that is the case, then the Court of Appeal did the plaintiff a favour by saving it from having to fight what was likely a losing case against the individual owners.  The second response is that the non-parties were not forced to join the arbitration, but if they did not, then they had to wait around (with interest on damages potentially increasing at a significant amount per year) to see what happens in the arbitration – but nobody was being forced to join the arbitration.  The third response is that all of this presumes that a different result would have been reached if there had been no arbitration.  Again, suppose that the clause only said “settle disputes … in Frankfurt”.  You can pretty much be guaranteed that if the court was sending the main lawsuit between the plaintiff and the German parent company back to Germany, it would have sent the claims against the two owners and the Canadian subsidiary over there as well.  Why?  Because of the concept of “forum non conveniens” – which means that the courts will send cases to where it is the most convenient for the parties.  It would make little sense to have one lawsuit in Germany and the second lawsuit – involving German nationals on basically the same facts – being tried in Canada.  That would be a bigger cost and waste to the parties (and to at least one court system) than to deal with everything in one country or the other.  So if this matter was dealt with as litigation instead of arbitration, the result would not necessarily have been any different – and thus it is not a valid reason to challenge the arbitration system.

The authors of the commentary then abandon discussion of the case and go on to complain that another problem with arbitration is that you can be stuck with 3 arbitrators.  While this may seem like a good idea at the beginning when there is a lot of money at stake, if the contract ends up being not worth a lot of money by the time that a dispute arises, then the parties are “stuck” having to pay for 3 arbitrators and the amount at stake doesn’t justify the cost.  That’s a fair comment.  It doesn’t mean, however, that it’s something that justifies doing away with arbitration clauses completely.  However the arbitration is commenced, there will eventually be some document that sets out what amount the plaintiff is seeking.  Some rules call it a Statement of Claim, some are called Terms of Reference, etc.  There is nothing to stop the parties from saying that any claims under $X shall be determined by one arbitrator and any claims over $X shall be determined by three arbitrators.  This alleviates the concern of the authors of the commentary.  Arbitration clauses shouldn’t be avoided.  However, companies (and their lawyers) should ensure that they give more thought to arbitration clauses than to simply stick in clauses like the following:  ”All disputes arising hereunder shall be resolved by arbitration pursuant to the Arbitrations Act, 1991.”  Being surprised that this doesn’t do the trick for you is like being surprised when somebody says “oh, you’re bleeding from both nostrils, both ears and both tear-ducts in your eyes, go see Billy Smith, the first year medical student, he ought to be able to patch you up” and that doesn’t do the trick for you.  If someone gets lazy with arbitration clauses and treats them as an after-thought in commercial agreements, don’t blame the entire system of arbitration that it cannot make a solution that works, just like the fact that Billy Smith not being able to fix your brain haemorrhage means that the entire medical system is faulty.

The ultimate suggestion of the authors of the commentary, as I have alluded, is therefore to simply scrap arbitration clauses.  Their view is that good litigation counsel can agree to an arbitration later on when the dispute arises.  That’s a lovely thought and I completely endorse it.  Now, back to reality.  Whether it is litigation or arbitration the result is the same: someone is going to win and someone is going to lose OR each side is going to win some issues and lose other issues.  If you have a party with a good lawyer who can tell it what are its chances of success – and if the lawyer says that the chances of success are not great – then no client will ever agree to an arbitration.  I had a case that was going to go to trial settle shortly before trial.  This was a case I never thought in a million years would have settled because the plaintiff and the other defendants (my client was a very minor player) were completely entrenched in their positions and the plaintiff wanted a ton of money and the other defendants were willing to put up something but nowhere near what the plaintiff wanted.  Suddenly, the plaintiff decided to settle.  Why?  We all learned out later on that it was because the main witness for the plaintiff had died.

While not guaranteed, as a general rule, litigation takes longer than arbitration to get the dispute determined.  If you are the defendant and you are likely to have to pay something to the plaintiff, do you want to pay that this year – and take the hit on this year’s profit and loss – or put it off to another year?  Moreover, there’s always the chance that a key witness might die / move / become ill / etc. and that affects the plaintiff’s case.  Litigation gives more than enough time for this to occur – certainly far more time than arbitration does.  In the U.S., the parties generally absorb their own costs regardless of the result of the dispute.  In Canada, the loser pays a portion of the winner’s legal costs.  In arbitration, the general rule is that the loser pays all or almost all of the winner’s costs.  So there’s a costs incentive towards litigation.  If you have parties in different countries, arbitral awards are relatively easy to enforce – while court judgments, as mentioned above, can be very problematic to enforce.

With these realities, how many defendants are going to want to go with arbitration over litigation?  Some, certainly, who might want confidentiality over their dispute.  But even that is not a guarantee.  I was at a conference a year or two ago and the head of the dispute department in the U.S. for either IBM or Kodak was speaking and she said that their view is that they absolutely never agree to arbitration and they only ever want to be before the courts.  That was just their policy.  If that’s the case, then it doesn’t matter how good, bad or otherwise counsel are, there will be no arbitration occurring once the dispute has arisen.

The authors suggest that arbitration clauses be scrapped.  I disagree.  They do go on, in a final sentence, to suggest that, at a minimum, one should consider more closely arbitration clauses.  With that I fully agree.  The more that an arbitration clause is not considered an “add-on” or a “throw away” clause and real consideration is given to what is to happen, the better the chances that the arbitration experience will not only be productive, but, in fact, more productive than litigation.

Something to think about.

CALC

 

 

Nowadays Assume an Arbitration will Proceed / Appointing Arbitrators

Tuesday, November 8th, 2016

I read today an interesting decision from the Ontario Court of Appeal a couple of weeks ago in Haas v. Gunasekaram.  Mr. Haas invested $200,000 in an Italian restaurant in Toronto that failed.  He then sued his co-owners for fraudulent misrepresentation saying that he was, in essence, duped into making his investment.  All of the co-owners were parties to a shareholders’ agreement and the other owners brought a motion to have the lawsuit stayed since there was an arbitration clause and they said that the dispute should go to arbitration.  The motions judge denied the motion and this was appealed to the Court of Appeal.  The Court of Appeal allowed the appeal and ruled that the dispute should go to arbitration.

In paragraphs 9 through 16, Justice Lauwers reiterates what has become fairly straightforward law nowadays that if there is an arbitration clause, the starting point is almost always to send it to arbitration and let the arbitrator(s) decide his/her/their jurisdiction (ie. ability) to decide the dispute.  Mr. Haas argued that only disputes related to the terms of the contract could be the subject of arbitration and that he was suing on the representations made to him that resulted in the shareholders’ agreement being created in the first place – so his dispute wasn’t covered by the arbitration clause.  The Court of Appeal disagreed and noted that the arbitration clause was broadly worded and, more importantly, did not exclude the type of claims that Mr. Haas was making.  As such, the dispute should go to the arbitrator(s) to let him/her/them decide if the dispute was within the arbitration clause.  The result isn’t particularly surprising since this does not really make any new law.

What is interesting, though, is the length to which the Court of Appeal was willing to give preference to arbitrations.  The arbitration procedure had a typical clause that provided that if the parties agreed on an arbitrator, then there would be one arbitrator.  However, if they didn’t agree, then the wording provided that “each party” would appoint their own arbitrator and then either those two arbitrators would appoint a third arbitrator or else (if they couldn’t agree) the Superior Court would appoint the third arbitrator.  Mr. Haas said that this was flawed since there were 4 parties.  As noted by Justice Lauwers at paragraph 49:

[49]        I agree with Mr. Haas that the arbitration agreement was designed for a bilateral agreement, not for an agreement with multiple partners, as this case presents, but that is not fatal. Mr. Haas argues: “If the clause is effective, Haas would immediately be outnumbered by arbitrators appointed by Gunam and Feng, stacking the arbitral panel against him.” There is a simple answer: if the parties cannot agree on a single arbitrator, then each side to the dispute will appoint an arbitrator to select a third arbitrator. If these arbitrators do not appoint a third arbitrator, then under the agreement a Superior Court judge will appoint one. There is nothing inoperable about the arbitration agreement.

For this particular case, and for this particular moment in time, the decision is fine.  As it stood on October 13, 2016 (when the decision was released), we have Mr. Haas on one side and the other three shareholders / owners on the other side.  No problem.  But what happens if two, or all three, of the other shareholders / owners start to fight among themselves.  Now we no longer have only two “sides” but could have either three or four sides.

So how does one deal with such a situation.  Mr. Haas’ concern was that he could be “ganged up on” if there are 3 arbitrators for the others and only 1 for himself.  A few things should be considered (and businesses and their lawyers should think about this when drafting their arbitration clauses):

1. Subsection 10(4) of the Arbitration Act, 1991 provides that if there is 3 or more arbitrators then they must elect a chair from among themselves.  Why?  Because if there is no unanimous or majority decision on an issue, then the chair has the tie-breaking decision.  So some further thought should be given to determining how a chair is to be selected in case the arbitrators cannot agree among themselves.  While subsection 10(4) indicates who is to make the decision on a chair, it does not go further to indicate what is to happen if they cannot agree.  Presumably, though, an application could be made to the Superior Court for the determination (or appointment) of a chair for the arbitral tribunal.  But it is often preferable to establish a procedure for making this determination rather than leaving it to a judge of the Superior Court who will impose (or at least that is how the “losing party” will feel) a chair.  Specifically giving powers to the chair of the tribunal may alleviate a “ganging up” situation.  For example, you can provide that the binding decision will be that of the chair and at least one other arbitrator – which could minimize or negate a concern similar to that of Mr. Haas in this case.

2. Subsection 11(1) of the Arbitration Act, 1991 provides that every arbitrator must be impartial and independent of the parties.  This helps to alleviate Mr. Haas’ concern that he would be ganged up on because the arbitrators should be impartial.  That’s all nice and wonderful in theory but, sometimes in practice, it’s a bit of a pie in the sky view.  If an arbitrator is consistently appointed by a particular party or law firm, there can be an implicit assumption that that arbitrator should try to find in favour of the party that appointed him/her in order to ensure future work from that party or law firm.  A way to minimize this is to ensure that there be certain standards imposed for arbitrators.  For example, saying that any arbitrator appointed by any party must be a member of the Chartered Institute of Arbitrators.  Why?  Because they have a code of ethics that requires strict impartiality.  To give an example, I worked hard (and spent a good deal of money) to get my Fellow status with the Chartered Institute (known as being an FCIArb).  Yes, it would be nice to get hired as an arbitrator and be paid for that arbitration.  But it wouldn’t be worth the risk of losing my FCIArb status if a complaint was made and found to be valid that I was not completely impartial.  In addition, if there truly is an issue of bias, then that is one of the bases on which an arbitrator can be challenged or on which any arbitral award can be challenged or not enforced.

3. There can be an agreement up front about picking one or three arbitrators and setting out a specific list.  For example, I had a settlement years ago where the lawsuit was being settled right away and the lawsuit would not go to trial.  However, there were valuation issues that would continue for at least another year or two and, while about 80% of the lawsuit could be finalized right then and there, the other 20% would require additional time and there could be further disputes about how to deal with that remaining 20%.  The parties decided that they would settle the lawsuit and deal immediately with the 80%.  In the event that any disputes arose for the 20%, those disputes would be handled by arbitration.  But the settlement went further and actually provided that it would be only one arbitrator and provided a list of 5 or 6 arbitrators, in order of preference, to be appointed – but the same could have occurred for a panel of 3 arbitrators with a slightly longer list of potential candidates.  If none of those arbitrators were available or willing to hear the dispute, then the first fallback was for the parties to agree on someone else or, failing that, to get someone appointed by an institution from its roster (I believe it was the ICC).  Agreeing to arbitrators before-hand (even if setting a list), can avoid the concern of impartiality since everyone should have agreed before any dispute even arises and therefore cannot feel that the arbitrator(s) is/are chosen with a bias in favour of whomever has appointed them.

Something to think about.

CALC

 

 

Get (More) Security – Repeal of Bulk Sales Act (?)

Monday, August 22nd, 2016

The joy of Summer reading is that you don’t do everything in a rush and look at things more leisurely.  That was the case with recent legislation that is proposed by the Ontario government.  Bill 218 is an omnibus piece of legislation that seeks to do all sorts of things – clean up existing legislation, repeal old legislation, replace other legislation.  The Bill can be found here.

Now, this is not law yet and will not be for at least another couple of months until the Legislative Assembly comes back from its Summer break and looks at the legislation more closely, etc.  But what is interesting is the proposed repeal of the Bulk Sales Act in Ontario – which would be effected through Schedule 3 of Bill 218.  The Bulk Sales Act is very old legislation that is a holdover from a time long gone by that, for whatever reason, remained in Ontario while being jettisoned in all other Canadian provinces and Territories.

OK, a little background.  If I am the owner of a business (and it is a company) and I want to sell my business, I have two options: (a) sell my shares in the company; or (b) sell the assets of the business.  If I am a sole proprietor, then all that I can sell are the assets of the business.  Now, if I sell my shares (assuming that it is a company), any creditors of the business have no complaints.  Why?  Because the company has incurred the debt and the creditor has the right to sue the company if there is non-payment and ultimately look to seize and sell the company’s assets if judgment is obtained and there is still no payment on the debt.  The sale of shares merely changes who are the owners of the company but the company’s assets are still there to satisfy any judgment.  But what if it is an asset sale?  Let’s suppose that A sells the assets of her business to B for $100,000.  There is no requirement for A to make a public announcement of the sale.  As such, if C is a creditor of A’s business, in most instances C will not know about the asset sale until after A has already sold the assets to B.  And therein lies the problem.  C cannot say to B “Hey, you took those assets subject to my claims against the business, so I get to sue you.” because, in most instances, B will have no knowledge that C even exists – let alone that C is owed money by A.  In such a case, C will likely be found to be a “bona fide purchaser for value without notice” and any claims of C would likely fail.  So who can C sue?  Well, A, of course.  The practical problem, though, is that by the time that C has learned of the sale, A has already received the money and either spent it or gone off to somewhere else to retire and A couldn’t give a plug nickel (speaking very politely) about C or any amounts owed to C.

To address this problem where C could end up being stuck with a bad debt, the Bulk Sales Acts were enacted.  What the law provides is that if a business is selling its assets, then the vendor has to provide a list of all creditors to whom the vendor owes money.  This list, which is attached to an affidavit, is not only given to the purchaser, but is also filed in the Superior Court of Justice.  The law goes on to say that arrangements must be made to pay off the creditors on the list at or before the closing of the sale of the assets and that if these arrangements are not made, then the unpaid creditors may be able to go after the purchaser (B in my example above).  There have been criticisms of the legislation and one which springs to mind is that this legislation can create a false sense of security.  For example, suppose that Vendor A gives the list to Purchaser B, but Vendor A conceals the fact that creditors X, Y and Z are owed a lot of money.  X, Y and Z might think that they are protected by the Bulk Sales Act because they should be listed as creditors – and thus payment arrangements would be made.  But, unless B has some reason to suspect that A is lying (or failing to be complete) on the list, then X, Y and Z have no claims against B who accepted the list from A in good faith and filed the affidavit in the court.

At this point, then, it would appear that creditors in Ontario should start to take pages from their colleagues in other provinces.  How do you deal with a debtor who owes a lot of money and you are concerned might sell the business?  Take security and register it under the applicable personal property security regime in the province.  That way, if A tries to sell to B, then B will either do a search under the PPSA and require A to pay you out on your debt or, if not, then you will have rights to say that B took the assets subject to the security granted to you and you have a right to seize and sell those assets covered by the security if B does not pay you the debt.

When I was in law school in the early 1990s, I remember my professor saying that the Bulk Sales Act‘s days in Ontario and the Maritimes were numbered.  The Maritime provinces repealed their legislation in the late 1990′s and early 2000′s.  Ontario waited.  It looks like Ontario’s time has come.  Instead of waiting for this legislation to be repealed through Bill 218 either later this year or sometime next year, it is probably best to take a proactive approach.  If you have a sales contract that will be large, or you have an ongoing supply agreement where the debts could be substantial, you may want to think now about asking your customers for security agreements and registering those agreements, since the Bulk Sales Act is not likely to be around much longer to give any protection to unpaid creditors.

Something to think about.

CALC

 

Renting on AirBnB? Things to Think About

Wednesday, February 24th, 2016

I watched a webcast today of a series of lectures on the law and temporary accommodation rental – renting through AirBnB and similar companies.  It is clear that with the advent of social media and the explosion in “online” business, that non-traditional methods of making money have grown.  Whether it is Uber for transportation or AirBnB for accomodation, times are changing – but that doesn’t mean that the law has changed.  And that was the topic of the lectures given on the webcast.

I should say at the outset that I use AirBnB all the time when I am travelling and I think it’s a great idea and I have had nothing but good things to say about the company.  I should also mention that AirBnB isn’t the only company doing this type of business, but I will mention it’s name only because it’s the name most people have heard of.

If you are thinking about renting out property through AirBnB or a similar service, then some of the things you should think about (as mentioned in the lectures) are:

1. Are you renting your place?  If so, then you may have problems with either the landlord or the other tenants in the building or with the authorities.  Examples include:

  • your lease could prohibit running a “commercial” venture in your residential apartment
  • subsection 134(3)(a) of the Residential Tenancies Act prohibits a tenant from subleasing a unit to a subtenant (and a temporary rental to a traveller would in most instances count as a subtenancy) for an amount greater than the rent which the tenant is paying.  So, if you are renting and paying rent to your landlord for $900 a month, for example, and in that month there are 30 days, then you are paying $30 a day in rent.  If you rent out your apartment through AirBnB or a similar service for, say, $40 a day, then you are in contravention of ss. 134(3)(a) of the Act.  This can mean, in accordance with paragraph 234(l) of the Act, that you can be charged with an offence and subject to a fine of up to $25,000 (as provided in section 238 of the Act)
  • if your “commercial” activity is discovered, the landlord could have reason to evict you simply because of this fact – even if you are not disturbing anyone
  • the landlord could also evict you if it turns out that your “guests” through AirBnB either cause damage to the property or disturb the other tenants

2. If you do not rent but you own your apartment, is it in a condominium?  If it is, then you could have problems with:

  • a term of the condominium declaration that restricts your ability to carry on this activity.  For example, the declaration could say that owners are only to use their units for single-family residential dwellings, or it might say that no commercial activities are permitted.
  • a term of the condominium’s by-laws
  • a term of the condominium’s rules

3. If you own your apartment, whether it is in a condominium or not, you could also have problems with:

  • existing zoning by-laws – for example, your house may be in a zoned residential area that does not permit commercial activities
  • existing licensing by-laws – you may be required to have a valid licence to carry on business and the failure to do so breaches the by-law
  • existing property standard by-laws

Now, when it comes to by-laws, lots of people think “well, as long as the City doesn’t know about it, I’m fine” or “what the heck, the City’s not going to do anything about this, they have bigger problems to deal with than my renting to some travellers from time to time.”  That may well be true, but Section 440 of the Ontario Municipal Act allows any taxpayer to bring an application to stop the breach of the by-law.  So, even if the City doesn’t do anything, your neighbour or neighbours who aren’t happy that there’s a parade of travellers going to and from your apartment or home and making noise, etc. can sue you for breach of the applicable by-law.

4. Will your insurance cover the situation?  Many “home” insurance policies cover only damage resulting from residential activities.  More importantly, many policies will expressly say that the insurance does not cover commercial activities.  If Mr. X is at your place because he has paid you to stay there, and then he damages something, there is a good chance that your insurer could deny coverage.  It’s probably not a big deal if Mr. X damages your couch.  It’s something completely different if Mr. X leaves the bathtub running and floods your place and the 3 neighbouring apartments immediately below you – that’s when you don’t want to hear that your insurance policy doesn’t cover the situation.

So, while it may be a good idea to make some money through renting your place out from time to time with services like AirBnB, it is also something that you should look into more closely to ensure that the money you make on the side doesn’t cost you more in the end than you expected.

Something to think about.

CALC

 

The Courts Can Rescue Your Contract … But Try to Avoid the Need for This (If You Can)

Monday, February 22nd, 2016

There has been a growing trend in contract litigation lately – the courts are more willing to step in and help an unfortunate party.

Example #1:  In the Supreme Court of Canada’s decision in Bhasin at the end of 2014, the Court held that there was a duty of good faith performance of contracts.  In that case, which can be found here, the plaintiff had a contract with the defendant which was automatically renewable unless notice of termination was given at least 6 months before the expiry of the existing term.  The defendant was found to have pressured the plaintiff to merge with a competitor and the trial court (and then the Supreme Court) found that when the plaintiff did not give in to the pressure and the defendant gave notice of termination (in accordance with the contract terms), that the defendant was not acting in good faith.  In doing so, the Supreme Court held that there was an implied term in all contracts that the parties would exercise their contractual rights in good faith.  [For more on this case, you can go to it or you can see my blog post from November 2014 on the case.]

Example #2: In May of last year, the Ontario Court of Appeal had a claim on a “guarantee” in Global Food Traders.  The “guarantee” was found in the following wording at the end of one paragraph:

“The Purchase Price shall be payable in 50 equal monthly installments of $10,000 commencing April 30, 2012 by post-dated cheques. If Mr. Massalin’s obligations are called upon pursuant to this Section he shall within three days provide the Seller with immediately available funds to cover any bounced or NSF cheques.”

The word “guarantee” does not appear anywhere in this wording and, accordingly, Mr. Massalin argued that this wasn’t an actual guarantee and he shouldn’t be found liable.  The Court of Appeal in its decision, which can be found here, did not have significant concern about the lack of the word “guarantee” and essentially found that it was clear that this was a guarantee obligation and that if there was any other possible understanding of this wording, Mr. Massalin had failed to provide what that possible understanding might be.

Example #3:  I had a trial last week in which my client said that there was a contract in which the defendants had agreed to share expenses 2/3 for them and 1/3 for him and this included payments on various leases that totaled approximately $100,000.  This was the arrangement, although only my client was named on the lease.  A few months into the leases, the other two companies refused to pay on the leases (one of them even shutting down business) and took the position that their names were not on the leases, so they had no obligation to pay.  Unfortunately for my client, there was nothing clearly setting out in writing that there was the agreement to pay.  Instead, I had to show (through both my client’s evidence and through cross-examination of the main officer/director of the defendant companies) that there were enough other documents indicating that there must have been such an agreement to pay (or else why would these documents say what they said).  Thankfully, the court agreed that there was, in fact, a verbal contract and gave judgment in favour of my client.

Whichever example you consider, the result is that the Court had to come to the rescue of one of the contracting parties.  This is not necessarily a new phenomenon.  What appears to be new, however, is the fact that the courts are more inclined to rescue unfortunate parties from their predicaments.  So what does this mean?  Firstly, it means that the days of strict reliance and interpretation of contracts is probably going (if not already having gone) the way of the Dodo bird.  I used to be able to say to clients that if the contract says X, then the result is X.  Now I have to say, if the contract says X, then the starting point is that the result will be X – but have you done or said anything that might cause a court to consider that the result should be something other than X?  Secondly, even if the courts have the power to come to the rescue and are willing to do so, that still shouldn’t be a cause for celebration.  Yes, my client had the court confirm that there was a valid verbal contract.  That is wonderful.  How much would it have cost my client to have the verbal contract put into writing?  Whatever the answer is, you can be absolutely guaranteed that the amount is nothing compared to the cost he spent on legal fees to have the issue litigated in court to get to the same result.  Similarly, if Global Food Traders had simply added a few words (including the word “guarantee”) to its agreement, they could have saved litigation through two levels of court.  And in all other cases, adding specific wording to address not only the anticipated “good” results of an agreement, but also taking a few moments to add wording to address any “what if something goes wrong” results of an agreement can save the need for a court to have to determine whether the other side performed its side of the deal in good faith or otherwise.

So, the courts can rescue your contract if something has gone wrong but, as always, an ounce of prevention is worth more than a pound of cure and it would be better to try and avoid having the court rescue your situation if that is possible.

Something to think about.

CALC

 

Record Retention Revisited

Saturday, January 3rd, 2015

It’s January and a not-so-young man’s heart turns to, um, er, well … administrative matters.  Time to put away closed files, do all those full (as opposed to “quickie”) bank reconciliations and general cleaning up of records to hand matters over to the accountant in the next month or so to get things ready for tax return and financial statement preparation.  Suddenly all those essays on what I did over Christmas vacation – even the ones I thought were really boring – seem to be super-exciting.  There’s nothing like a day spent cleaning your desk and organizing paper to get the old motor running !!

On April 10, 2009, I did a post that looked at records retention and gave some of the reasons for keeping records and what the consequences were of not keeping records if you should later be sued.  I think it’s time to revisit and expand on this topic and to discuss further the amount of time that one should keep records.

The answer to the question of how long should you retain records is a gigantic “that depends”.  Different records have to be retained for different periods of time and it becomes difficult to say with certainty.  However, I can give a bit of a helpful start.

BEFORE ALL OF THIS HOWEVER – ONE KEY RULE:  If you have been sued, or if there is a threat by someone that they will sue you, then all documents should be segregated and retained.  If the lawsuit is actually started, then nothing should be destroyed.  If it is only a threat, then records should be kept at least a minimum of 2 years from the date of the threat to sue you and, preferably, for 4 years or more.

1. Tax records.  For our friends at the C.R.A., the general rule is that you have to keep records for a period of 6 years.  That is, unless they tell you otherwise – in which case you have to keep the records for such additional period of time as is set out in the notice.  The current version of the CRA’s record keeping guide can be found at:

http://www.cra-arc.gc.ca/E/pub/tg/rc4409/README.html

[NOTE: I'm having trouble with my linking function, so please cut and paste the above and put in your browser instead of clicking on the link.  Thanks and sorry for the inconvenience.]

2.  Formal documents.  Wills.  Government issued documents (birth certificates, marriage certificates, immigration documents, real estate documents such as deeds to land, mortgages, etc.).  Trust deeds.  Documents such as these should be kept as long as you are alive (for personal documents – and, in the case of wills, even after your death) or with the business.  Probably the easiest way to define a formal document is to ask yourself (a) whether people normally go to a lawyer to get this type of document prepared or for help with these documents and (b) whether your replacement (for example, the executor of your estate, your replacement at work, etc.) would want or need to know about the existence of this document to be able to handle matters after you are no longer there.

3. Industry requirements / guidelines.  Are you in a regulated business?  For example, you are a doctor/dentist/chiropractor and the applicable College has rules requiring you to keep patient records and charts and x-rays for a specific minimum period of time.  If so, then you must comply with those requirements.

4.  Corporate records.  These are things like the articles of incorporation, by-laws, corporate resolutions – in other words, everything that is found in your company’s minute book.  The initial answer is simple – for however long your company exists, you keep these records.  A minute book for a company that has been around for 40 years should have 40 years worth of resolutions, etc.  But what happens if and when the company is wound up or otherwise ceases business.  Then you should keep them for either the 6 year tax requirement set out above or for the period of time determined for the next category – whichever is longer.

5.  General records (that is, everything not in categories 1, 2, 3 or 4).  There is no absolute requirement for the retention of records.  Suppose you get a letter from a supplier advising of the changes of prices to the supplies that you order.  If you continue to get invoices for your supplies, CRA is going to care about what you actually pay for your supplies, so you would have to keep the invoices for tax purposes, but the letter announcing the price changes is in most instances going to be irrelevant for the CRA.  If you ask most business people, they will say “it’s just a notice document, it’s not important, so feel free to throw it away as soon as you get it.”  And this is where the lawyer’s perspective differs from the business person’s perspective.  What happens if a dispute arises related to the price change?  When did you get notice of the change?  How did you get notice (was it a letter / notice / e-mail / fax)?  What were the terms of the price changes (for example, it’s hard for you to say “you told me that the new price would be $5 and now you’re charging me $7″ if you don’t have any longer the notice that said $5)?  So how long do you keep these records?  The answer is a resounding “I dunno”.  I’m not trying to be cute.  Let’s start with the easy answer – if the document relates to something more than 15 years ago, you are probably safe in destroying it.  But if the time since the document was created or the event to which it relates is less than 15 years ago we’re now into a grey area.

Again, let’s go with the minimum time period – two years.  Everyone in Ontario has up to 2 years to sue another person for any claim(s) that the first person has against the second person.  As a result, and at a minimum, therefore, you should keep records for at least two years.  The problem, however, is when does the 2 year period start to run?  An example should help.  Suppose you go to a party on New Year’s Day, 2014 and get more than tipsy and someone punches you and breaks your nose.  You definitely have until December 31, 2016 to sue the person.  But what if you don’t know (or remember) who did it?  And what if you find out on December 1, 2016 who did it?  Do you have only until December 31 to sue or do you have until November 30, 2018 – being two years after you learned of who did it?  Another example, you do a business deal and you are pretty sure that the other side has committed a fraud on you.  You cannot, however, confirm your suspicions until 3 years later – are you too late to sue or do you have 2 years from when you were able to piece it all together?  The answer for both questions is a resounding “it depends”.  The rule is that you have 2 years from when a reasonable person in your circumstances would have known that he/she could have sued.  If you did nothing for more than 2 years and then started to make inquiries after that time, you’re probably too late.  If you diligently looked everywhere for the information necessary to learn if you had a proper claim, you’re probably OK.  The reality, however, is that most cases fall somewhere in between these two extremes – and that’s why each case, and the answer to when the 2 years starts running, will depend on its own facts.

Now, we’ve looked at it from the perspective of when a plaintiff might be able to make a claim.  From the plaintiff’s perspective, he/she/it is likely going to keep the records relating to the claim.  But now suppose that you are the potential defendant.  You may not know that anything is wrong for years until suddenly one day you get a letter from a lawyer or you are served with a Statement of Claim.  If that happens more than 2 years later, you might get caught with your pants down (so to speak) if you have destroyed the documents related to the claim.  I often say to clients that if you want “pure” justice, you have to wait until you die and the other person to die and then God can give you pure justice.  Until then, the best you can get down here on Earth is justice based on whatever evidence can be proven in a court of law.  And in most commercial disputes, that translates into “he/she who has the most documents to prove her/his side of the case will win the case.”

At an absolute minimum, I would say that you should keep all documents for at least 2 years.  Beyond that, I would highly recommend that you keep documents for at least 5 years.  If you have the room in your business’ office (or in your garage or if you rent a storage locker), then I would recommend that you keep the records for 10 years or more.

Personally, I keep all of my records in this category for at least 15 years.  Yes, that means that this year I can finally destroy records from 1999 and all of my records will be “new millenium” documents.

Whatever you determine to be your “cut off point”, I further recommend, however, that you consider scanning documents before you destroy them.  Did you enter into a big sales contract 20 years ago that ended 15 years ago?  If yes, then you can probably destroy it now (assuming that you haven’t been sued on the contract).  But before you do that, why not run it through the scanner and save it?  The storage of many documents on one CD or DVD takes up almost no physical room in your office – but if you later get sued and a court determines that it was not too late for the plaintiff to sue then at least you will have some documents remaining.  In my case, therefore, I will be scanning documents for 1999 before they are destroyed.  The response to this suggestion that I often get is “but that’s going to take forever and I don’t have the staff to do it / can’t afford it / etc.”  The answer is simple: hire a local high school kid to do it.  You do not have to index the documents and just about any monkey can put a pile of paper in a sheet feeder on your multi-function printer/scanner/fax and press the “scan” button and save the file as “XYZ Inc. file” or whatever the name is for the file.  The high school kid gets office experience, your regular staff are free to do their jobs, and the cost to you is minimal (and a total pittance compared to the potential cost of not having the document anymore and you are sued on them).

Something to think about.

CALC

 

 

Good Faith Performance of Contracts

Friday, November 14th, 2014

When I was a law student at McGill, one of the main areas where the Quebec civil law for contracts was different from the common law for contracts used in the rest of Canada was with respect to the imposition of a general duty of good faith performance of contracts.  As I practised in Ontario in the years that followed, this distinction was made quite explicit and the Ontario Court of Appeal re-affirmed from time to time that there was no such general duty.  Not surprisingly, though, as I gained experience of the “real world”, I would be asked by my clients from time to time if they could do something that they knew the other side of a contract would object to, but which was within the strict wording of the contract.  My answer became something along the lines of “strictly speaking, you are entitled to do this since it is clearly within the letter of the contract.  That said, you never know what a judge is going to do and if he/she thinks that you have broken the spirit of the contract – which this probably does – then you should be concerned that a judge might try to find a way to find against you because of this.  Happily, though, there is no general duty of good faith performance in contract law, so the chances of a judge doing this are minimized.”  Well, thanks to a decision of the Supreme Court of Canada yesterday in Bhasin, the last part of this advice will have to be scrapped.

In Bhasin, the contract had a renewal clause and provided that it would renew automatically unless either party gave notice at least six months before the end of the contract’s term that they did not wish to renew the agreement.  The defendant was involved in attempts to move the business from the plaintiff to a different party and, for lack of a better phrase, “strung the plaintiff along” and in some cases lied and in some cases gave equivocal answers.  Then the defendant invoked the notice provision and terminated the contract.  The Supreme Court of Canada held that this was not proper.  More importantly, however, they recognized a full “free standing” general duty of good faith performance of contract.

Mr. Justice Cromwell found that such a duty existed in certain types of contracts: employment contracts, insurance contracts or tendering situations.  In addition, some courts in Canada (like B.C. or Nova Scotia) were inclined towards a general duty of good faith performance while others (such as Ontario) were not so inclined.  Meanwhile, the Quebec (see article 1375 of the Civil Code) and the United States did have general duties of good faith performance.  For Justice Cromwell, it was time to put an end to the patchwork arrangement and have a general approach to the issue.  In finding a general duty of good faith performance, and while trying to set out a general framework for such a duty, Justice Cromwell has provided some guidance but also some areas that will create at least initial confusion and require the courts to clarify the rules through future cases.  For example, Justice Cromwell wrote:

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard”for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith.

The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest …  Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency… The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree?justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. …

I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.

Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it …

The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty.  A party to a contract has no general duty to subordinate his or her interest to that of the other party. …   But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty.

Wow, how do you reconcile all that?  Not easily.

Until yesterday it was easy.  I could simply say that there was no duty of good faith performance, but to be safe consideration should be made to ensure that the “spirit” of the deal wasn’t broken.  Now, every party will have to ensure that the “spirit” of the contract is honoured because to do otherwise could lead to a claim that there was bad faith in performing the contract.

Something to think about.

CALC

 

Two in One Day – Q.Arb.

Friday, October 17th, 2014

Well, it’s been a lucky day for me today.  As mentioned in my last post of a little while ago, I received word from London, England earlier today that I had been accepted as a Fellow of the Chartered Institute of Arbitrators.  Then this afternoon I received word that I had been accepted for accreditation by the ADR Institute of Canada with their Q.Arb. designation.  I probably have more letters after my name than in my name now!

Since it’s been such a lucky day, I better pick up a lottery ticket on the way home tonight!

CALC